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The Importance of Cash Flow Management for Every Business Owner

Time to read
2 minutes

Having good financial management is a must for any business. In addition to preparing and understanding your budget, it is also essential that you monitor your cash flow. If you don’t manage it well, you can run out of cash to pay the bills. Pan Am Airlines, for instance, was once a high-flying brand. But it is now gone and whilst the underlying reasons are complex these led to cash flow problems and the company ultimately ran out of cash.

What Could Go Wrong and the Things You Can Do to Manage Cash Flow Better

1. Not Following GAAP

GAAP or the Generally Accepted Accounting Principles is an accounting methodology that, amongst other things, helps keep track of the “money in and money out.” If you don’t follow this system, your company will be running blind.

What you can do: Implement these standards to ensure your company has reliable accounting information that you can use to base your financial decisions on.

2. Counting Profit Before Collecting Payments

You may have sent the invoice. But did you receive the payment? Sometimes, customers tend to stretch pay periods. As a result, you may see the top line figure, without knowing if they’ve actually paid you and then find out you don’t have the cash you thought you had.

What you can do: Have a system in place that lets you collect payments on time as agreed. In this way, your receivables are in balance with your payments.

3. Disregarding Cash Obligations

One of the most common mistakes by business owners is that they don’t prioritise bills and other liabilities. These can easily accumulate and become hard to manage, which may ruin your cash flow.

What you can do: Pay bills regularly, take advantage of agreed credit periods and make sure that you are monitoring the money that goes out and tracking the money coming in. Use the accounts payable module of an accounting system to help track payables and schedule payments.

4. Having Unnecessary Expenses

Many businesses spend money on unnecessary things, such as certain staffing costs. They often miscalculate their true personnel costs, how many people they need and how much they should pay them.

What you can do: Before you go through hiring an employee for a certain job, look into outsourcing. For instance, instead of hiring a bookkeeper, why not outsource it to a dedicated provider of these services. This can significantly reduce your overall expenses.

5. Undercharging for your Products and Services

It’s easy to think that you can charge less to beat your competitors to the sale. But it’s not necessarily realistic, unless you are guaranteed to receive a significantly higher volume of sales.

What you can do: Perform competitive analysis to explore how much you can charge your customer for a particular service/product while still being competitive.

6. Ignoring Where your Money is Going

It’s easy to be blind as to where your money is going if you don’t have a budget or an investment plan. If you don’t have a clear plan it’s easy to lose sight of what your income is being spent on.

What you can do: Create a solid plan to help you spend more wisely. In this way, you will be better prepared for unexpected expenses and big future purchases.

There are other things that can go wrong that may leave you with no operating cash. You can enhance your cash flow in a number of ways, like improving debt collections, managing inventory, controlling interest and bank charges etc. It is critical to ask for help from a business adviser or your accountant as early as possible. Remember that issues with cash flow can indicate operational problems that require your attention.

Do you want to learn more about how Sanay can help you manage your cash flow to facilitate growth in your business? Schedule a free consultation today!